Steven N.J. Wlodychak is the former indirect (state and local) tax policy leader for EY’s Americas Tax Policy and a retired principal in EY’s National Tax Department in Washington, D.C.
In this installment of The Hissing Goose, Wlodychak examines Ferrellgas v. New Jersey, which addresses the constitutionality of New Jersey’s $150-per-partner annual fee on partnerships filing a return in the state.
Just before Thanksgiving, my son and I drove from northern New York state where he lives to Virginia. As we drove on the northern stretch of the New Jersey Turnpike where mountains of former trash dumps run for miles, I asked him what he thought of the area a few miles from where I grew up. A “bit disappointing,” he said in a glib understatement. Similarly, I can describe a decision of the New Jersey Tax Court, which has been confirmed twice by an intermediate appellate court and then that state’s supreme court by denying certiorari, only as a “bit disappointing.” Appropriately, now that ruling is on appeal to the U.S. Supreme Court.1 I hope it grants certiorari and reverses.
In Ferrellgas Partners,2 Judge Mala Sundar, who has otherwise written some very good opinions (even, I’d say, when they go against the taxpayer), missed the boat on this one by a mile. In a lengthy letter opinion, she upheld New Jersey’s ability to impose a $150-per-partner “fee” on the grounds that the fee wasn’t a tax and therefore didn’t need to be apportioned among the states in which the publicly traded partnership3 was doing business. In the record of the case, even the New Jersey Division of Taxation initially seemed to recognize there might be a bit of a constitutional problem with imposing an unapportioned fee for the collection of a tax by promulgating regulations that actually provided apportionment for the fees attributed to nonresident partners.4 Instead of upholding the division’s regulations, Sundar found that those regulations were inconsistent with the statute5 (which did not provide for apportionment) and struck them down, reinstating the unapportioned fee (with a $250,000 annual cap) just as enacted by the Legislature.
I don’t know about you, but common sense tells me what a fee is and what a tax is. Having grown up in New Jersey, a fee is what you pay to go to the beach. (Yes, for those of you living in nearly every other state, New Jersey still allows municipalities to impose a fee to step on an ocean beach.) Fees are the tolls you invariably pay for the privilege of sitting in traffic on the New Jersey Turnpike or the Garden State Parkway. A fee is what you pay to visit the Turtle Back Zoo to entertain the kids. A fee is what you pay for the pleasure of spending your entire day registering your vehicle at the New Jersey Motor Vehicle Commission. A fee is compensation to the government for a service or privilege unique to the payer. It is not what you pay for the “privilege,” if one can even call it that, of filing a tax return with the New Jersey Division of Taxation, the proceeds of which are deposited to the state’s general fund and used without limitation to support the state’s general services (even if one could reasonably conclude that a sliver of it would be used to fund the state tax agency’s processing and audit activity). By any reasonable measure, that’s a tax.
Other state legislatures that have tried to do the same thing New Jersey has done have been admonished by their own courts for fooling around with commonsense definitions in order to avoid the fundamental principle that payments made to support the general services of the states, including tax collection, are taxes that have to be apportioned or allocated so they don’t discriminate against interstate commerce and are intended to avoid the possibility of double taxation.6
Just think about it: If Sundar is right (and I hope I am not spilling the beans on an obvious “secret” that other state legislatures will want to readily follow in order to raise revenue by imposing new unapportioned fees on those nonresident partners who can’t vote against them), why wouldn’t every state enact a per-partner tax return processing fee just like New Jersey’s? Why stop there? Why not impose a similar fee based on the number of shareholders a corporation has or on the number of shares the corporation has outstanding? (Yes, I know Delaware does that under its corporate franchise tax but only for corporations incorporated in Delaware, and in any case, no one objects since they can organize their corporation in such a way that they can use one of two measures to pay the least amount of tax.7 Membership, as they say, has its privileges.)
Of course, such a position is ludicrous because if it is a tax, it clearly violates the internal consistency test the U.S. Supreme Court set down many years ago. In this case, the math demonstrating the burden on interstate commerce is extraordinarily simple. If every state had one of these “fees” like New Jersey, a partnership with just 1,667 partners (Sundar’s math, not mine8) doing business in every state conceivably would be subject to a maximum $250,000 in each state, or $12.5 million per year! Are the states really going to use that money to process a particular partnership’s tax return? The taxpayer explained all this to Sundar, who summarily rejected the argument. Give me a break!
The taxpayer’s petition for certiorari is a tour de force in this matter, and I encourage you to read it. The state’s response is due December 2, so we’ll know soon enough if the Supreme Court will take this important case. I sincerely hope it does.
FOOTNOTES
1 Ferrellgas Partners LP v. Director, Division of Taxation, U.S. S. Ct. No. 21-641, pet. for cert. filed Oct. 28, 2021.
2 Ferrellgas Partners LP v. Director, Division of Taxation, Dkt. No. 007051-2014 (N.J. Tax Ct. Dec. 7, 2018) (tax court ruling), aff’d, Dkt. No. A-3904-18T1 (N.J. Super. Ct., App. Div. Jan. 13, 2021) (appellate court decision), cert. denied, C-694 Sept. term 2020, 085367 (N.J. S. Ct. June 4, 2021). For nice summaries of both the tax court ruling and the appellate court decision, see Andrea Muse, “Court Finds Partnership Fee Regs Invalid,” State Tax Notes, Dec. 17, 2018, p. 1124; and Muse, “Appellate Court Upholds Partnership Filing Fee,” Tax Notes State, Jan. 18, 2021, p. 288. The New Jersey Supreme Court denied the taxpayer’s petition without comment.
3 As described in the appeals court’s opinion, Ferrellgas had more than 65,000 partners in all relevant years. Appellate court decision p. 11 (“For tax year 2009, [Ferrellgas] had 67,019 partners of which 2,542 were residents or partners with nexus to New Jersey. For tax year 2010, of the 66,835 partners, 2,423 were residents or partners with nexus to New Jersey. For tax year 2011, of the 82,047 partners, 2,927 were residents or partners with nexus to New Jersey.”).
4 N.J.A.C. 18:35-2(b) (“If a partnership includes nonresident partners, some of whom have physical nexus with New Jersey and some of whom do not, then an apportionment methodology for the partnership filing fee may be used, provided that the partnership has an office outside New Jersey.”). The complete regulations are codified at N.J.A.C. 18:35-11.1 to -11.6. In apportioning the fee, the division adopted the corporate allocation factor (New Jersey calls its apportionment factor an “allocation” factor) based on a single sales factor.
5 N.J.S.A. 54A:8-6(b)(2).
6 See, e.g., Northwest Energetic Services LLC v. California Franchise Tax Board, 159 Cal. App. 4th 841, 854-855, 71 Cal. Rptr. 3d 642, 2008 Cal. App. LEXIS 162 (Cal. Ct. App. 1st Dist. Jan. 31, 2008), rev. denied, 2008 Cal. Lexis 6988 (June 11, 2008) (“Although the [California] Legislature plainly labeled the Levy [California’s annual LLC fee] as a ‘fee,’ the statutory language does not indicate whether the Levy is imposed for purposes of raising general governmental revenue, for funding benefits and services, or for funding a regulatory provision. [citations omitted] Labeling the Levy a fee is not determinative of its nature.”); Sinclair Paint Co. v. State Board of Equalization, 15 Cal. 4th 866, 874 (1997) (“The [California] cases recognize that ‘tax’ has no fixed meaning, and that the distinction between taxes and fees is frequently ‘blurred,’ taking on different meanings in different contexts. [citations omitted]. In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted. [citations omitted] (‘Taxes are raised for the general revenue of the governmental entity to pay for a variety of public services.’) Most taxes are compulsory rather than imposed in response to a voluntary decision to develop or to seek other government benefits or privileges [citations omitted]. But compulsory fees may be deemed legitimate fees rather than taxes.”); and Weisblat v. City of San Diego, 176 Cal. App. 4th 1022, 1043 (Cal. Ct. App., 4th Dist. 2009) (“If revenue is the primary purpose of a levy and regulation is merely incidental, the levy is a tax, but if regulation is the primary purpose, the mere fact that revenue is also obtained does not make the levy a tax. Here, the undisputed facts show that the primary, if not the sole, purpose of the levy is to raise revenue to pay for the costs of collecting the [San Diego City] Business Tax, including the RUBT [billing statement and processing fee set at $25], and of administering the Business Tax program. Any regulatory effect is merely incidental.”).
7 Del. Code tit. 8, section 503 (rates for computation of Delaware corporate franchise tax).
8 Tax court ruling at 27 (“It may be that there would be less of an incentive to do business using a partnership or LLC form of business entity, since the [New Jersey partnership filing fee] is an added expense/cost to the entity. It may be that there would be a similar disincentive to form partnerships with over 1,667 partners (since that number times $150 is $250,000).”).
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